Although the 10K and Q4 results were not good, CNYD is cheap here at a market cap of 28M. Despite a tough year, they still earned 62 cents a share and produced $17M in operating cash flow. This is despite a slower recovery for the main tourist attraction Great Golden Lake (58% of Q4 tourist revenue) only recovering slightly and still well below their expected tourist flow. Both Great Golden Lake and Yunding Recreational Park are trending in the right direction, but well below expectations due to road accessibility being limited. The local government is rebuilding the main local road to Great Golden Lake, but this will not be completed until the beginning of 2013 at the earliest. CNYD now has about $30M in debt, which was needed to finance their construction of their 2 new properties that they hope to complete this year. The media business still generates the bulk of CNYD’s revenue (77% of Q4 revenue) but it has been decreasing at an accelerating rate (13% for the year, but 38% for Q4). This is particularly worrisome especially for 2012 as it generates the bulk of the earnings and cash flow due to its high margins. CNYD expects the slowdown to continue in 2012 due to continued restrictions by the government. From a valuation perspective, this stock is ridiculously cheap, mostly due to the pessimistic view the market has taken on all things in the small cap China space, with particular disdain for reverse merger stocks. I think the sentiment of this sector will continue to drive this stock. In addition, problems with access to its two main tourist assets and increased borrowing to build their new tourist sites, combined with the continued decline of their media business is negatively impacting the stock. 2012 will likely show a continued decrease in both revenue and earnings due mostly to the decline of the media business. Therefore, despite the depressed stock price, there will not likely be too many catalysts for the stock this year. However, the news is not all bad. The main reason the reverse merger space is so depressed is heightened fear of fraud. This fear is warranted, but overall this space should be a lot safer as most of these companies have now passed their 2nd annual audit in an environment where the auditor is on high alert for fraud. The fact that CNYD published their 10K this week with their auditor’s unqualified opinion gives me a lot more comfort that there isn’t any major fraud going on. Pope’s recent purchase activity (90,000 shares on March 2 and 5 subsequent purchases totaling 42,000 shares) and the CEO’s purchase (at $3) also gives me comfort that things are on the up and up. I think if fraud risk is greatly reduced, than this stock deserves to be trading at a higher valuation than its 2.25 PE ratio. With that being said, I will not rush to buy any more shares at this point given that 2012 will likely show decreased revenues and earnings. I’d like to see tourist traffic to Great Golden Lake and Yunding Recreational Park continue to increase and see the new parks completed before year-end. I also hope to see the media business level out (Sean, any thoughts on the likelihood of this or do they expect to lose this business completely at some point?). I do still like the stock long term, especially at this cheap valuation, but think that it may be dead money in 2012. I’ll revisit buying more shares at the end of 2012 or early 2013, unless the share price goes below $1 before then, in which case I think I would have to buy more. I will continue to hold my current shares and keep my expectations low for now. Long term, this is still a great opportunity, especially as the Chinese middle class continues to grow. I plan to hold this stock for a long time (at least 5 year) and hope to look for a chance to buy more as the tourist business turns around.
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